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Tony's Ten: About time for a new Governor

30 November, 2012Tony Gandy

About time for a new Governor 

Mark Carney new Governor of the Bank of England; who would have thought we needed an overseas person to run our piggy bank for us? But it seems only fair as we ran their money for a while. 

The Bank of Canada was formed in 1934. It began operations in 1935 as a private institution and was taken over by the state in 1938 – substantially before the Old Lady of Threadneedle Street was nationalised in the UK. 

Of the 8 Governors they have had at the Central Bank of Canada, yes only 8 since 1934, one, John Crow (1987-1994) came from the UK, so it seems only fair they send one over to us. 

Carney fits with the international agenda. 

According to research (yeah I bet) from totaljobs.com – 27% of overseas workers coming to the UK are working for the financial services sector. Clearly, London’s role as the capital of international finance is always going to mean very large rotations of ex-pat staff. 

The same survey found that 42% of French workers wished to move to the UK to work to avoid the very high tax rates in their country. I hope Mr Carney spent sometime in Québec and learnt French…this may help “les taux d'intérêt seront inchangés ce mois-ci” 

The machines are taking over 

UBS has been among many banks slashing numbers on their trading desks, in their case focusing on their fixed income (bond trading) business. While UBS is downgrading its role in what is the major business in investment banking, they are still a player. But if you get rid of your £1m star brokers, who do you replace them with? Well according to Bloomberg, software running advanced trading algorithms

Algorithm (Algo) trading is an amazing world full of sniper programs (looking for people who are mispricing an asset), gorilla programs (looking to hide very large jumbo buy or sell trades through splitting them across multiple markets) and, of course, high frequency low latency trading. Indeed high frequency automated trading systems now absolutely dominate most markets. While we still think of the leaders as being the big investment banks, your Morgan Stanley’s and Goldman Sachs etc, in fact broking and market making are now dominated by firms such as Getco, Virtu and Knight Capital. 

Getco is in the top 5 traders and market makers in almost every major equity market in the world – yet only has 400 staff. 

Getco and Virtu are currently bidding to take over Knight Capital because it recently suffered one of the problems facing high frequency algo traders; a run away algo decision making tool which lost them hundreds of millions before it was turned off. Knight represents 10% of all US equity trading volumes. 

These algo related crashes are happening on a frequent basis. For example this Wednesday (28th) we saw a flash crash in gold, not a huge one, just a 2% fall, but that is a lot in the gold market. No one knows exactly why, but it is thought it was a “fat finger” incident where a trader or a program accidently oversold, maybe by double or triple pressing the ‘0’ key on a sell order. This itself may not have been a big deal, but then algo programs recognised the sudden fall in price and that panicked the computer programs as the algos started to see their stop-loss price triggers (the failsafe price which you tell the machine to sell at to make sure you are not left holding an asset which has tumbled in price) being crossed so the software sells, pushing the price lower. 

The gold fluctuation on Wednesday saw half a million future contracts exchanged in a day, a record number representing 1500 tons of gold, or half a year’s mining production. 

The problem for Joe or Joanna Blogs is that they can’t trade at that pace. It is the Blogs who end up holding the shares or the commodity after the machines have done all their selling. It means traditional investors and even the people who kid themselves they are “day traders” who are doomed to buy at the top and sell at the bottom as they cannot match the speed of the computers.